Tight money slows major gas developments - activities in the petroleum industry of South and Southeast Asia - Far East - Industry Overview

World Oil, August, 1998

Oil-related projects continue, but several big gas marketing programs and their associated field developments have been delayed due to currency problems and stalled economic growth

CHINA

A major reorganization of the petroleum industry, the move of China National Petroleum Corp. (CNPC) into international operations, soaring petroleum demand accompanied by record imports of crude and products, and a continuing lack of world-scale discoveries are events of recent interest in the People's Republic of China.

The massive restructuring of China's petroleum industry, scheduled to have gone into effect on July 1, is one part of the government's effort to downsize its bloated bureaucracy, get rid of duplication among government agencies and get bureaucrats out of all businesses.

For many years the oil and gas industry in China was organized into an onshore E&P organization, CNPC, which essentially produced most of the oil in the country, and a downstream entity, China National Petrochemical Corp. (Sinopec), a refiner and petrochemical manufacturer, which processed CNPC crude exclusively. The new structure creates two conglomerates patterned after Western integrated oil companies, now named the CNPC Group and Sinopec Group. To achieve this, Sinopec transferred 19 refinery and petrochemical enterprises to CNPC and CNPC transferred 12 producing entities to Sinopec.

The new CNPC will retain 2.14 million bopd of production and Sinopec will acquire 720,000 bopd. Almost all of the remaining 300,000 bpd produced in the country comes from offshore and will remain with China National Offshore Oil Corp. (CNOOC). CNOOC and China National Star Petroleum Corp., a small upstream company formed in 1996 to operate properties developed earlier by the Ministry of Geology & Mineral Resources, will continue to function separately from CNPC and Sinopec.

Whether this reorganization attempt toward a Western-style integrated company and management means much when it comes to bureaucracy remains to be seen, since the government has bestowed on both new companies the same authority previously exercised by that government. And many large Western companies have long been noted for our own style of entrenched bureaucracy. CNPC had already adopted some of that Western management style in announcing last February that 250,000 employees would be laid off over the next three years to improve economic efficiency.

Supply/demand. Last year saw another sharp increase of 10.1% in Chinese crude and product demand to 3.95 million bpd after 7.9% and 8.7% increases in 1996 and 1995, respectively. This resulted in a marked increase of 50 % in gross imports to 1.2 million bpd and an astonishing 244% boost in net imports, which now account for 20% of China's consumption.

The large discrepancy between import and demand increases is attributable to three factors. First, domestic production has remained stuck in the 3-million-bpd range for the last five years. Second, government-mandated prices for domestic crude rose above world market prices, so China's Sinopec conglomerate, which previously bought all domestic production not exported, began importing cheaper feedstock rather than buying domestic crude. Third, large volumes of products the first part of this year have reportedly been smuggled into the country due to Asian economic problems.

This year, the International Energy Agency (IEA) projects a 7.7% increase in demand to 4.26 million bpd. With the new organizational structure discussed above, CNPC and Sinopec presumably will refine their own domestic production and each will be able to import for their own account.

A result of China's growing energy crunch was CNPC's major expansion into international operations in June 1997 in an effort to guarantee a future supply of up to 200,000 bopd from other countries by 2000. So far, CNPC has signed various forms of operating and development agreements with Iran, Venezuela, Iraq and Kazakhstan; formed a joint venture with AGIP to develop prospects outside China and Italy; and has been negotiating to acquire 80% of an onshore oilfield in Thailand developed originally by Shell. The Iraq venture will presumably await lifting of UN sanctions.

Exploration. Seismic activity last year totaled 65,300 mi of 2-D and 4,270 sq mi of 3-D. Of that total, 1,055 mi of 2-D and 580 sq mi of 3-D were tallied offshore. In 1998, CNOOC plans to markedly increase offshore 3-D work to 1,620 sq mi and 2-D to 9,320 mi. No projections are available for onshore.

Exploratory drilling last year totaled 1,067 wells and 8.8 million ft of hole, of which 32 tests were offshore. Exploratory well drilling as usual was concentrated around the three largest groups of onshore oilfields in China, Daqing, (102 wells), Shengli (244) and Liaohe (89).

China's most productive wildcat in 1997 was drilled by Apache Corp. in shallow waters of Bohai Bay, off the southern extremity of the onshore Dagang complex of oilfields. Although drilled in the bay, operations are under auspices of CNPC and the location is thus classified as being "onshore."